Rent reviews are there to help ensure the rent being paid is consistent with market rates. However, how and when a rent review can take place may be subject to the Retail Leases Act 2003 (Vic) (the Act).
The Act limits the methods of a rent review under a retail lease. A rent review can only be one of a fixed percentage, consumer price index (CPI), a fixed amount or a market review. A retail lease can provide for different methods of review, such as CPI one year and a fixed percentage adjustment the next year, as long as the methods are not mixed.
What you need to know
- If acting on behalf of the landlord and you want to ensure that the rent does not decrease, then market reviews must be avoided as a market rent review under a retail lease cannot provide that the rent must not fall.
- In a low inflation environment a fixed rent increase give landlords the certainty of the rent payable. It is important that a rent is not specified as being the greater of CPI and say 3%, as this is void and can result in a market rent determination under the Act.
We were recently requested to advise as to whether in a retail lease of a supermarket it was possible to have a rent review based on the average of the rent paid in the preceding few years. This is a common mechanism used in Coles supermarket leases.
Whilst this may be a convenient way of adjusting the rent, such a mechanism is void under the Act. If the lease includes such a mechanism, this will be void and a market review can follow to determine the rent.
As such, where advising a landlord or a tenant under a lease which is governed by the Act, it must be remembered that rent reviews are limited to one of a fixed annual amount, CPI adjustment, a fixed percentage adjustment or a market review. Further, rents can rise or fall to reflect the method chosen.
Due to the operation of the rent review mechanism under the Act, it is vitally important that a determination is made as to whether the Act applies to a lease. If it does, any rent review is limited in the manner specified above. In particular, market rent review clauses cannot have a floor, so that the rent may fall.
If you have any queries regarding your lease, do not hesitate to contact us.